
[Federal Register Volume 75, Number 127 (Friday, July 2, 2010)]
[Notices]
[Pages 38587-38589]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-16147]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62399; File No. SR-ISE-2010-34]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Order Approving Proposed Rule Change Relating to Fees for the ISE 
Order Feed

June 28, 2010.

I. Introduction

    On May 11, 2010, the International Securities Exchange, LLC 
(``Exchange'' or ``ISE'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend its Schedule of Fees to 
adopt subscription fees for the sale of a new market data offering 
called the ISE Order Feed. The proposed rule change was published for 
comment in the Federal Register on May 25, 2010.\3\ The Commission 
received no comment letters on the proposed rule change. This order 
approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 62117 (May 18, 
2010), 75 FR 29381 (``Notice'').
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II. Description of the Proposed Rule Change

    ISE proposes to establish subscription fees for the sale of the ISE 
Order Feed, which provides real-time updates every time a new limit 
order that is not immediately executable at the best bid/offer 
(``BBO'') is placed on the ISE order book.\4\ ISE Order Feed contains 
information on individual limit orders including the order type (buy/
sell), the order price, the order size, and customer indicator (which 
reflects whether the order is a customer order), as well as details for 
each instrument series, including the symbols (series and underlying 
security), put or call indicator, the expiration and the strike price 
of the series.
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    \4\ The ISE Order Feed does not include market orders, immediate 
or cancel orders, quotes, or any non-displayed interest.
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    The Exchange proposes to charge distributors \5\ of the ISE Order 
Feed $2,000 per month and $10 per external controlled device \6\ per 
month. For subscribers who redistribute the ISE Order Feed externally, 
or redistribute the ISE Order Feed internally and externally, the 
Exchange proposes to limit for any one month the combined maximum 
amount of fees payable to $2,500. The ISE Order Feed will be made 
available to both members and non-members on a subscription basis. Upon 
Commission approval, the Exchange intends to begin charging the ISE 
Order Feed fees on July 1, 2010.
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    \5\ A ``distributor'' is any firm that receives the ISE Order 
Feed directly from ISE or indirectly through a ``redistributor'' and 
then distributes it either internally or externally. All 
distributors will be required by the Exchange to execute an ISE 
distributor agreement. ``Redistributors'' include market data 
vendors and connectivity providers such as extranets and private 
network providers.
    \6\ A ``controlled device'' is as any device that a distributor 
of the ISE Order Feed permits to access the information in the ISE 
Order Feed.
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III. Discussion and Commission Findings

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\7\ In 
particular, it is consistent with Section 6(b)(4) of the Act,\8\ which 
requires that the rules of a national securities exchange provide for 
the equitable allocation of reasonable dues, fees, and other charges 
among its members and issuers and other parties using its facilities, 
and Section 6(b)(5) of the Act,\9\ which requires, among other things, 
that the rules of a national securities exchange be designed to promote 
just and equitable principles of trade, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system and, in general, to protect investors and the public interest, 
and not be designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers. The Commission also finds that the 
proposed rule change is consistent with the provisions of Section 
6(b)(8) of the Act,\10\ which requires that the rules of an exchange 
not impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.
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    \7\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(4).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 15 U.S.C. 78f(b)(8).
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    The Commission has reviewed the proposal using the approach set 
forth in the approval order for SR-NYSEArca-2006-21 for non-core market 
data fees.\11\ In the NYSE Arca Order, the Commission stated that 
``when possible, reliance on competitive forces is the most appropriate 
and effective means to assess whether the terms for the distribution of 
non-core data are equitable, fair and reasonable, and not unreasonably 
discriminatory.'' \12\ It noted that the ``existence of significant 
competition provides a substantial basis for finding that the terms of 
an exchange's fee proposal are equitable, fair, reasonable, and not 
unreasonably or unfairly discriminatory.'' \13\ If an exchange ``was 
subject to significant competitive forces in setting the terms of a 
proposal,'' the Commission will approve a proposal unless it determines 
that ``there is a substantial countervailing basis to find that the 
terms nevertheless fail to meet an applicable requirement of the 
Exchange Act or the rules thereunder.'' \14\
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    \11\ See Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770 (December 9, 2008) (SR-NYSEArca-2006-21) (``NYSE 
Arca Order'').
    \12\ Id. at 74771.
    \13\ Id. at 74782.
    \14\ Id. at 74781.
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    As noted in the NYSE Arca Order, the standards in Section 6 of the 
Act do not differentiate between types of data and therefore apply to 
exchange proposals to distribute both core data and non-core data.\15\ 
All U.S. options exchanges are required pursuant to the Plan for 
Reporting of Consolidated Options Last Sale Reports and Quotation 
Information (``OPRA Plan'') to provide ``core data''--the best-priced 
quotations and comprehensive last sale reports--to

[[Page 38588]]

OPRA, which data is then distributed to the public pursuant to the OPRA 
Plan.\16\ In contrast, individual exchanges and other market 
participants distribute non-core data voluntarily.\17\ The mandatory 
nature of the core data disclosure regime leaves little room for 
competitive forces to determine products and fees.\18\ Non-core data 
products and their fees are, by contrast, much more sensitive to 
competitive forces. The Commission therefore is able to rely on 
competitive forces in its determination of whether an exchange's 
proposal to distribute non-core data meets the standards of Section 
6.\19\
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    \15\ Id. at 74779.
    \16\ See OPRA Plan, Sections V(a)-(c).
    \17\ See NYSE Arca Order, supra, note 11, at 74779.
    \18\ Id.
    \19\ Id.
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    Because ISE's instant proposal relates to the distribution of non-
core data, the Commission will apply the market-based approach set 
forth in the NYSE Arca Order. Pursuant to this approach, the first step 
is to determine whether ISE was subject to significant competitive 
forces in setting the terms of its non-core market data proposal, 
including the level of any fees. As in the NYSE Arca Order, in 
determining whether ISE was subject to significant competitive forces 
in setting the terms of its proposal, the Commission has analyzed ISE's 
compelling need to attract order flow from market participants, and the 
availability to market participants of alternatives to purchasing ISE's 
non-core market data.
    The Commission believes that the options industry currently is 
subject to significant competitive forces.\20\ It is generally accepted 
that the start of wide-spread multiple listing of options across 
exchanges in August 1999 greatly enhanced competition among the 
exchanges.\21\ The launch of four options exchanges since that time, 
numerous market structure innovations, and the start of the options 
penny pilot \22\ have all further intensified intermarket competition 
for order flow.
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    \20\ The Commission has previously stated that the options 
industry is subject to significant competitive forces. See 
Securities Exchange Act Release No. 59949 (May 20, 2009), 74FR 25593 
(May 28, 2009) (SR-ISE-2007-97) (order approving the ISE's proposal 
establishing fees for a real-time depth of market data offering).
    \21\ See generally Concept Release: Competitive Developments in 
the Options Markets, Securities Exchange Act Release No. 49175 
(February 3, 2004), 69 FR 6124 (February 9, 2004); see also 
Battalio, Robert, Hatch, Brian, and Jennings, Robert, Toward a 
National Market System for U.S. Exchange-listed Equity Options, The 
Journal of Finance 59 (933-961); De Fontnouvelle, Patrick, Fishe, 
Raymond P., and Harris, Jeffrey H., The Behavior of Bid-Ask Spreads 
and Volume in Options Markets During the Competition for Listings in 
1999, The Journal of Finance 58 (2437-2463); and Mayhew, Stewart, 
Competition, Market Structure, and Bid-Ask Spreads in Stock Option 
Markets, The Journal of Finance 57 (931-958).
    \22\ See, e.g., Securities Exchange Act Release Nos. 55162 
(January 24, 2007), 72 FR 4738 (February 1, 2007) (SR-Amex-2006-
106); 55073 (January 9, 2007), 72 FR 4741 (February 1, 2007) (SR-
BSE-2006-48); 55154 (January 23, 2007), 72 FR 4743 (February 1, 
2007) (SR-CBOE-2006-92); 55161 (January 24, 2007), 72 FR 4754 
(February 1, 2007) (SR-Phlx-2006-62); 55156 (January 23, 2007), 72 
FR 4759 (February 1, 2007) (SR-NYSEArca-2006-73); and 55153 (January 
23, 2007), 72 FR 4553 (January 31, 2007) (SR-Phlx-2006-74).
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    ISE currently competes with seven options exchanges for order flow. 
Attracting order flow is an essential part of ISE's competitive 
success.\23\ If ISE cannot attract order flow to its market, it will 
not be able to execute transactions. If ISE cannot execute transactions 
on its market, it will not generate transaction revenue. If ISE cannot 
attract orders or execute transactions on its market, it will not have 
market data to distribute, for a fee or otherwise, and will not earn 
market data revenue and thus not be competitive with other exchanges 
that have this ability.
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    \23\ ISE states in its filing that it ``has a compelling need to 
attract order flow from market participants in order to maintain its 
share of trading volume.'' See Notice, supra note 3, at 29382.
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    ISE must compete vigorously for order flow to maintain its share of 
trading volume. This compelling need to attract order flow imposes 
significant pressure on ISE to act reasonably in setting its fees for 
ISE market data, particularly given that the market participants that 
will pay such fees often will be the same market participants from whom 
ISE must attract order flow. These market participants include broker-
dealers that control the handling of a large volume of customer and 
proprietary order flow. Given the portability of order flow from one 
exchange to another, any exchange that sought to charge unreasonably 
high data fees would risk alienating many of the same customers on 
whose orders it depends for competitive survival.\24\
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    \24\ Id. at 29383.
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    In addition to the need to attract order flow, the availability of 
alternatives to the ISE Order Feed significantly affects the terms on 
which ISE can distribute this market data.\25\ In setting the fees for 
the ISE Order Feed, ISE must consider the extent to which market 
participants would choose one or more alternatives instead of 
purchasing its data.\26\ The most basic source of information 
concerning the depth generally available at an exchange is the complete 
record of an exchange's transactions that is provided in the core data 
feeds.\27\ In this respect, the core data feeds that include an 
exchange's own transaction information are a significant alternative to 
the exchange's market data product.\28\ Further, other options 
exchanges can produce their own market data products, and thus are 
sources of potential competition for ISE.\29\ In addition, one or more 
securities firms could act independently and distribute their own order 
data, with or without a fee.\30\
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    \25\ See NYSE Arca Order, supra note 11, at 74784.
    \26\ Id. at 74783.
    \27\ Id.
    \28\ Id. Information on transactions executed on ISE is 
available through OPRA.
    \29\ In its filing, ISE states that ``[o]ther exchanges, 
including some who may enjoy greater market share than ISE, are 
potential competitors as they too sell similar market data offerings 
that market participants may choose to purchase instead. For 
example, NASDAQ OMX PHLX (``PHLX'') has filed a proposed rule change 
to adopt fees for a market data product that includes a data feed 
that is similar to the ISE Order Feed. See Securities Exchange Act 
Release No. 61878 (April 8, 2010), 75 FR 20023 (April 16, 2010) (SR-
PHLX-2010-48). The PHLX' Specialized Order Feed, which PHLX has 
proposed to integrate into its TOPO Plus Orders market data 
offering, includes `real-time information to keep track of single 
order book(s).' '' See Notice, supra note 3, at 29383.
    \30\ Id.
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    The Commission believes that there are a number of alternative 
sources of information that impose significant competitive pressures on 
ISE in setting the terms for distributing the ISE Order Feed. The 
Commission believes that the availability of those alternatives, as 
well as ISE's compelling need to attract order flow, imposed 
significant competitive pressure on ISE to act equitably, fairly, and 
reasonably in setting the terms of its proposal.
    Because ISE was subject to significant competitive forces in 
setting the terms of the proposal, the Commission will approve the 
proposal in the absence of a substantial countervailing basis to find 
that the terms of the proposal fail to meet the applicable requirements 
of the Act or the rules thereunder. An analysis of the proposal does 
not provide such a basis. Further, the Commission did not receive any 
comment letters raising concerns of a substantial countervailing basis 
that the terms of the proposal failed to meet the requirements of the 
Act or the rules thereunder.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-ISE-2010-34) be, and it hereby is, 
approved.


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-16147 Filed 7-1-10; 8:45 am]
BILLING CODE 8010-01-P


